Ethics Don't Always Pay, But Lack of Them Always Hurts

The good news, experts say, is that largely competent captains who shun shoddy bookkeeping and offshore high jinks are running the U.S. corporate engine. The bad news is that good executive behavior doesn't guarantee success. A pile of stock options or other instant gratification rarely awaits those who consider doing only the right thing.

Dennis Bakke, CEO of energy company AES, "was honest as the day is long," says Notre Dame business ethics professor Pat Murphy. He empowered his workers to make big decisions and took no cash pay for years, only stock options. The stock fell 90% under the weight of debt, and investors began to see his style as too idealistic. Bakke resigned last month. "If ethical behavior always paid, everyone would always be ethical," says Harvard Business School professor Richard Tedlow, author of Giants of Enterprise: Seven Business Innovators and the Empires They Built. "The difficulty with trust and character is that it doesn't show up on a balance sheet."

Accounting scandals have rocked such blue-chip giants as Enron, WorldCom and Xerox. In just 11 business days last month, 44 CEOs left, according to outplacement firm Challenger Gray & Christmas, and the Fifth seems to have become the CEOs' favorite constitutional amendment.

However, the new drumbeat for ethics might be drowning out lessons of the past. Companies sometimes suffer when unpopular decisions aren't made fast enough. In the 1980s, companies such as Kodak and Xerox boasted of never laying off a worker. But those jobs-for-life policies likely delayed necessary changes, making those companies vulnerable to competitive forces, and might have caused even more job cuts in the end.

Lost investor confidence this time has staggered the stock market. Yet, as bad as the market has been, there are more than three dozen Standard & Poor's 500 stocks, mostly Old Economy standbys in businesses that are easy to understand, that have doubled or more since March 2000, when the S&P 500 index hit its high. Nearly 100 companies are up more than 50 percent, while the index is down 38 percent.

Plenty of companies are run by "Jimmy Stewart" CEOs who, like the late actor, do things without fanfare, says Jim Collins, author of the best-seller Good to Great: Why Some Companies Make the Leap . and Others Don't.

Companies that are successful decade after decade, such as Johnson & Johnson, have one thing in common, Collins says: They have core values that are supported from the top. Procter & Gamble decided in its infancy during the Civil War not to gouge the military with low-grade soap and candles. P&G still thrives, Collins says, while Enron and WorldCom thrived short term and are now all but gone. "Doing it right doesn't guarantee success," says Bill George, former CEO of Medtronic, who is writing a book on authentic leadership. However, doing it wrong guarantees eventual failure. "You can skate across thin ice, but it eventually catches up to you."

George says doing what is right is difficult up and down an organization. Sales agents want to cut corners to keep from losing accounts, and managers of foreign divisions are tempted to "do as the Romans do" to compete when standards are looser abroad. "But by having integrity, for every order you lose, you'll get three more," George says.

Despite a bad last month, AutoZone stock is up 91% since last September. CEO Steve Odland says it's impossible to know if all his 45,000 employees act ethically. But he says a tone can be set at the top that there will be zero tolerance for illegal and unethical behavior.

And while he can't watch every employee, the top 40 executives meet monthly for a half a day to spot any significant changes in the numbers. If there are variations, they look for an explanation. Odland personally approves all consulting contracts and any bill above $75,000. But mainly, he says, his company is simple. It buys auto supplies from manufacturers and sells them at retail stores. All sales are recorded through a scanner. "I don't know any way of falsifying it," he said.

Odland says AutoZone never makes predictions for analysts, a common practice known as earnings guidance, because companies lose credibility by making artificially low predictions and risk upsetting shareholders if the prediction is too high. "People are saying we've got to pass laws, but in fact, what has been happening have been violations of laws," Odland says. "It's not a lack of laws or rules, it's that people aren't following them."

Accounting rules don't even make sense sometimes to Larry Nichols, CEO of Devon Energy, a company with 3,600 employees. But that's no excuse not to follow them, and Nichols says Devon sails through audits. Nichols is on a small but growing list of CEOs who have come out in favor of jail terms and big fines for executive lawbreakers. "I'm shocked by the shenanigans going on. The book ought to be thrown at them."

What of the ignorance defense used by Enron, and now WorldCom? "The notion that a CEO doesn't know what is going on with the numbers is laughable," says Robert Crandall, retired CEO of American Airlines parent AMR. Just months ago, plaudits were given to Tyco International's Dennis Kozlowski and WorldCom's Bernie Ebbers, both now gone amid controversy. There was much less fanfare for William Weldon and David Glass, successful CEOs who followed Jimmy-Stewart-like in the footsteps of James Burke at Johnson & Johnson and Sam Walton at Wal-Mart.

Jeffrey Immelt and Sam Palmisano will now be watched to see if they can carry on the success of their famous predecessors, respectively, Jack Welch at General Motors and Lou Gerstner at IBM. Collins says he can't say if CEO values overall are any worse than they've ever been. But one thing seems evident: "The bad CEOs are really bad."